The Preqin Quarterly Q2 2010

8/8/2019 The Preqin Quarterly Q2 2010

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The

Preqin QuarterlyPrivate Equity - Insight on the quarter from the leading provider of alternative assets dataQ2 2010 JULY 2010

Content Includes....

Latest Fundraising Figures

Lowest aggregate fundraising

total since 2003 reveals

continuing challenges.

Performance as of

Q4 2009

Latest figures show private

equity performance

continuing to improve.

Buyout Deals

Q2 2010 is the strongest

quarter for private equity-

backed buyout deals in the

post-credit crunch landscape.

Terms and Conditions:

ILPA Principles

Are the ILPA principles being

followed? We investigate.

Q2 Special Guest Contributors: Glenn Siegel & Davin Hall, Dechert // Tripp Brower, Capstone Partners


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2

Editor:

Tim Friedman

Chief Production Editor:

Helen Wilson

Sub-Editor:

Claire Wilson

Contributors:

Manuel Carvalho

Helen Kenyon

Adam Palmer

Etienne Paresys

External Contributors:

Tripp Brower, Capstone Partners

Davin Hall, Dechert

Glenn Siegel, Dechert

London:

Scotia House

33 Finsbury Square

London

EC2A 1BB

United Kingdom

Telephone: +44 (0)20 7065 5100

Fax: +44 (0)87 0330 5892

New York:

230 Park Avenue

10th Floor

New York

NY 10169

US

Telephone: +1 212 808 3008

Fax: +1 440 445 9595

Email:[email protected]

Web: www.preqin.com

Contents

1. Editors Note 3

2. Expert CommentsTripp Brower, Capstone Partners 4

Glenn Siegel & Davin Hall, Dechert 5

3. Investor Survey Results6

4. Q2 Fundraising in FocusFundraising Overview 8

Regional Fundraising 11

Buyout & Venture Fundraising 12

Private Equity Fundraising: Other Fund Types 13

5.Funds on the Road

Funds on the Road Overview 14

Funds on the Road by Type 15

6. Fundraising Future Predictions 16

7. Q2 Private Equity-Backed Deals in FocusDeals Overview & Deals by Region 17

Deals by Type, Value & Industry 18

Largest Deals & Notable Exits 20

8. Dry Powder 21

9. Performance Update 22

10. Fund Terms & Conditions: ILPA Principles 23

11. About Preqin25


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The Preqin Quarterly, Q2 2010

3 2010 Preqin Ltd. / www.preqin.com

Editors Note

The second quarter of 2010 represents a turning point for the industry, with the latest data on fundraising, dealflow and

institutional investor appetite providing us with some important clues as to the future of the private equity asset class.

Within the buyout sector, we have seen the most active quarter since the onset of the financial crisis. As our report on

page 17 shows, $43bn in new deals has been announced in Q2 2010. A similar surge has been seen in exits, with a total

of $42bn being realized.

While still some way short of the activity levels experienced in 2006 2008, this is certainly a positive sign for the

industry, and is welcome news for the institutional backers of the asset class.

Fundraising has been exceptionally challenging over the past couple of years, with investor confidence shaken after fundvaluations fell dramatically in late 2008 and early 2009. In addition, a lack of capital flowing back to investors in the form

of distributions meant many investors were able to maintain their allocations while making very few new commitments.

Many of the bigger fund managers that raised significant vehicles over recent years have delayed their re-entry into the

fundraising market, relying on the relatively high levels of dry powder collected during the boom times (see our article on

page 21 for more details).

This combined with low levels of investor confidence in the asset class resulted in a dearth of new vehicles achieving

a final close. As our report on page eight shows, fundraising reached a new low point during Q2 2010 with only $41bn

raised across all fund types globally the lowest total since 2003.

With the capital cycle now gathering steam, investors will be receiving more in the way of distributions. After seeing

performance for the industry rising significantly in recent quarters (see page 22), investors are slowly showing signs of

increased confidence and this is reflected in our LP survey results, which can be found on page six.

Although an improvement in fundraising will not come overnight, heightened levels of deals activity and the improvement

in fund performance will lead to a recovery in fundraising, with early 2011 now looking to be the period when activity

really picks up as more of the brand name firms embark on the fundraising trail.

The outlook for private equity is looking brighter, although there are still many challenges facing firms investing capital

and for those seeking out commitments for new vehicles.

The Preqin Quarterly utilizes data from a variety of Preqins products and publications in order to give a detailed overview

of the latest market conditions. We are also thrilled to have guest articles from leading placement agent Capstone

Partners and top law firm Dechert providing further perspectives on the key trends affecting the industry.

We hope that you find the publication to be informative and interesting, and as ever we welcome any feedback and

suggestions that you may have.

Tim Friedman, Editor


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Despite an apparent rise in confidence amongst LPs,Preqins second quarter fundraising stats shows newfundraising to be at its lowest point since 2003. When doyou see things picking up?

It will be the first half of 2011 before we start to see areasonable pick-up in fundraising. Many investors are lookingfor ways to reduce the overall number of PE relationships,so re-ups are under heavy scrutiny, and the requirementsfor adding a new GP relationship are high. These decisionsoften pivot on performance, especially a GPs ability to delivercompelling, consistent cash on cash returns. Although thereis a large number of fund managers seeking capital (many ofwhich are high quality teams with interesting strategies), thelevel of realizations is not as high as the LPs would like.

Many of the brand-name and historically top-performing GPshave delayed fundraising due to limited deal transactionsin 2008-09, deeper re-up queues and tight allocations. Thefundraising machinery is still jammed, and even thoughLPs balance sheets are healthier, it will take time for this totranslate into a significant increase in commitment levels.

We will see a more focused priming of the pump effortlater this year from GPs that intend to be in the market by2011. Our guidance for groups planning to raise capital isto talk to your existing LP base and targeted new investorsin the second half of 2010 so that they know you arecoming to market. LPs forward calendars are loaded, socommunicating earlier will provide a better shot at getting theright attention.

So fundraising is certainly becoming a more long-termconsideration?

GPs that excel in fundraising know its a perpetual effort.

Fundraising does take on a different intensity when youactually have an offering in market and are truly raisingcapital, but routinely the GPs that do fundraising well aretreating the LP side of the equation with nearly as much focusas their deal flow generation. Thoughtful GPs systematicallycommunicate news of organizational developments, dealsand exits with LPs that did not invest in the last fund butcame close and remain interested in following their progress.

To what extent are LPs cashflow situations hinderingthe market?

LPs have not seen much in the way of capital calls ordistributions, certainly primary factors in the slowing of thefundraising market. The tough environment over the past

couple of years impeded new investments and exits. We arenow starting to see a real pick-up in dealflow, with positiveimplications for GPs that are selling into that dealflow andable to return capital to their LPs. This can only serve toimprove investor confidence and pave the way for LPs to

redeploy this capital either to existing GPs or to others thathave made a compelling case for their new vehicle.

So what areas and strategies are investors interested inright now?

Certainly areas of market dislocation and disruption areof interest, anywhere there are inefficiencies in markets -where the opportunities for cash on cash return are high andcompelling. LPs are generally searching for opportunitiesin smaller funds, although definitions of small will varyconsiderably from LP to LP. More specifically, there are somehealthy buyout strategies, whether generalist, operationallyintensive, or industry focused, that are getting attention. Thecontrolled distressed arena in the small fund category haslots of room to run in terms of LP appetite. Special situationsand opportunistic strategies with an edge are generallygetting good interest from investors.

To what extent are fund terms and conditions dictatingnegotiations between LPs and GPs?

LPs have power with regards to fund terms in the currentmarket. This is the first time in 20 years that I have seen LPsreally driving terms so that they are at least neutral if not LPfriendly. On the economic side of the equation, we are talkingabout management fees, carry waterfalls and transactionfees, and on the governance side, terms like key-manclauses need to have real substance to them. Views arebeing expressed early on in negotiations and are playing animportant part in the overall fundraising process.

LPs have also made it clear that they view the commitmentsthat GPs make to their own funds as an extremelyimportant factor, and those that are able to make oversizedcommitments can make a big statement and inspireconfidence in potential LPs.

Private equity is in the spotlight on several levels political, regulatory and fiscal. What is your take on thevarious initiatives?

Time and space limitations make addressing this topicdifficult at best. Suffice to say that the cost and complexityof running a PE business are on the rise. At the risk ofgeneralizing, much of the regulatory action in the US andEurope is aimed at avoiding systemic risk, enhancinginvestor protection, increasing transparency and providing

regulatory bodies with more power. The recent SECannouncement banning unregistered placement agents fromdealings with public pensions strikes us as a constructiveregulatory solution to problems created by a few bad actorsin the placement industry. Given the economic challengesin the US, its also no surprise that GPs are viewed as oneof the means of raising tax revenue via pending changesin the tax treatment of carried interest. In the category oftransparency, private equity and hedge fund managers havebeen preparing for the required SEC registration (still to beapproved by both houses of Congress) that at this stage isinevitable. While the additional reporting and compliancerequirements will have some benefits, hopefully the variousregulatory bodies will resist the temptation to over reach. Thebest advice is to follow the frequent reporting on FINREG

developments, the AIFM Directive, and other initiatives tostay current and prepare for the implications to the privateequity industry.

Expert Comments

Capstone

Partners

Interview with Tripp Brower, June 2010


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2009 was a record year for defaults and restructurings.Ownership of companies changed rapidly and, giventhe freeze up in capital markets, most of the new capitalstructures were significantly deleveraged leaving little role forpre-existing sponsors and other equity holders of troubledcompanies. Halfway through 2010, even though actual

bankruptcies have declined, restructuring continues throughan amendment and forbearance process that is driven by thepotential consequences to stakeholders in a court-supervisedrestructuring. Private equity and distressed debt funds areactive participants in this process as a result of their equitypositions in portfolio companies and as active investors.

This article will briefly discuss the way major players inthese troubled situations achieve their goals with a particularemphasis on current shareholders and those who wishto become the shareholders at the conclusion of theprocess. These strategies can be employed by the currentequity sponsor on its own or in collaboration with a partner(preferably a senior lender). Alternatively, an interestedinvestor - with the inclination to provide lending and other

forms of liquidity during the transition to new ownership - canposition itself as the likely acquiror of the business.

Given virtually every distressed businesss need for workingcapital and the inevitable constraints created by thecovenants present in most credit agreements, the ability toraise capital provides the willing lender tremendous leveragein the operation of the business and the fate of ownership.Outside of bankruptcy the pre-existing lender will insist thatnew dollars be put in on a junior basis and, in the case of thesponsor, may insist on a capital contribution.

An interested bidder for the business may seek to benefitfrom this dynamic by offering to purchase the existing seniordebt (at par or at a negotiated discount) coupled with an offer

to provide new liquidity. Increasingly, the interested biddermay even be a current lender with the flexibility to own thebusiness or who may have bought into the credit previouslyallowing for the possibility of an opportunity to own. Theexisting equity sponsor can also seek to take advantage ofthis by purchasing the senior secured debt so long as it isnot prohibited from doing so by the loan documents. Thissituation is most likely to exist where there is a second lienand the second lien holders have prohibited the purchase ofsenior debt by the sponsor.

The cost of this new liquidity may be a forced bankruptcywhere the existing senior debt is converted to equity orthe assets are sold at auction subject to a senior creditorsright to credit bid. To ensure greater control over therestructuring, a distressed investor can provide debtor inpossession financing (DIP financing) to the company onceit commences a chapter 11 case. DIP financing can enablethe distressed investor to take control of the negotiationsconcerning the companys chapter 11 plan or to control

the sale of assets to the DIP lender by conditioning theextension of postpetition credit on the approval of covenantsthat require any chapter 11 plan or sale of assets must besatisfactory to the DIP lender.

At the conclusion of the restructuring (whether out of court

or in court), new financing extended by the distressedinvestor can be converted into equity or exit financing of therestructured company, and additional liquidity for the targetbusiness can be raised through a rights offering. Below webriefly discuss a few recent, relevant bankruptcy cases toillustrate potential acquisition strategies and attendant risksfor distressed investors.

Acquisition of Company by DIP Lender - In the DelphiCorporation case, the company sought to sell substantiallyall of its assets to a third party private equity firm where thesale proceeds would have been insufficient to pay the DIPlenders in full. Notwithstanding this attempt, the bankruptcycourt recognized the rights of the DIP lenders to credit bidand eventually the company supported a sale of most of its

business to the DIP lenders.

Acquisition by Conversion of Senior Debt to Equity andRights Offering - In the chapter 11 restructuring of LyondellChemical, the lenders sponsored a plan of reorganizationwhereby they would contribute their claims for new equity inreorganized Lyondell, as well as backstop a rights offering ofnew stock and new notes, using the proceeds of the rightsoffering to partially pay down their debt claims.

Acquisition by Second Lienholders by Reinstatementof Senior Debt - In Charter Communications, a balancesheet restructuring of the company around subordinatedbondholders was made feasible through the reinstatementof the companys senior credit facility. This was possiblebecause the reorganized company had the capacity toservice the existing first lien debt and the court found that therestructuring did not otherwise violate the loan documents.

Attempts to Block the Right of Secured Creditors toCredit Bid In the Philadelphia Newspapers case, theThird Circuit held that while a secured creditor has the rightto credit bid in stand-alone sale of assets to a third party,the court could confirm a plan of reorganization over theobjection of a secured creditor that was not allowed to creditbid. In reaction to this decision, the secured creditors ofPhiladelphia Newspapers bid cash at the auction and werethe successful bidders. This strategy was easy for thesecreditors to implement since they had the available liquidity

and knew they would receive thefi

rst cash from closing asthe senior lienholder.

Disallowance of Vote of Creditor Which Purchases ItsClaim with the Goal of Buying the Business - In DBSDNorth America, the bankruptcy court did not count thevote of a strategic competitor which purchased debt withthe expectation of acquiring the companys assets to theexclusion of every other restructuring alternative.

In the current environment, investors can take advantage ofdepressed valuations to acquire businesses with the potentialfor substantial returns or increase their ownership stakes inexisting portfolio companies at favorable valuations. In orderto maximize their chances of succeeding, investors must be

willing to provide short-term liquidity as a bridge to ownershipwhile keeping in mind that they always run the risk of beingoutbid.

DechertInvestor Strategies to Realize Returns in

Troubled Situations, Glenn Siegel & Davin

Hall.

2010 Preqin Ltd. / www.preqin.com


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Investor Survey Results

Investor Survey Results

The financial crisis has clearly had a significantimpact on private equity fundraising over the past18 months. Funds that reached a final close during

2009 secured $279bn in capital commitments, a far cryfrom the $643bn secured by the funds that closed theyear before. Investor confidence in private equity alsosuffered as fund valuations fell during 2009 and the lackof dealflow in the industry left many investors over-committed to the asset class with a shortage of capital fornew investments.

Despite increasing fund valuations and evidence

of improving investor appetite for private equity

seen towards the end of 2009, fundraising in early

2010 still fell below levels seen the previous year:

in Q1 2010, 97 funds closed having raised $60bn,

compared to the 174 funds which closed in Q1 2009

having raised $77bn. Furthermore, our December

2009 LP survey showed that the proportion of

investors seeking to reduce their private equity

allocations over the coming year had reached a

considerable 13%, though perhaps this was a

reflection of the fact that many LPs found themselves

over-allocated to the asset class at this time.

Investor Attitudes to Private Equity in Mid-2010

In June 2010, Preqin spoke to 100 of the most

prominent institutional investors across the globe

in order to assess their current appetite for the

asset class. Despite the slow start to fundraising

in 2010, the results of the survey show continuing

improvement in investor attitudes towards private

equity, with 54% of respondents already having made

at least one commitment during the first half of the year.

Almost two-thirds (65%) of respondents told us they intend

to make their next commitment to a private equity fund

during the second half of 2010. A further 19% anticipate

doing so in 2011. In December 2009 a quarter of investors

were uncertain when they would next be active in the

asset class, but just 12% of respondents in June 2010 had

yet to decide on the timing of their next commitment.

For many investors, the amount of capital they will set

aside for new commitments in 2010 will be greater than

the amount they pledged to vehicles in 2009. As shown in

Fig. 1, 44% of investors intend to use more capital for newcommitments in 2010 than they did in 2009 and a further

third intend to commit the same amount. An investment

company in the Middle East declared that it will definitely

invest more in 2010; 2009 was a wait and watch year.

It is worth noting, however, that in June 2010, almost aquarter (23%) of respondents anticipated committing less

capital in 2010 than in 2009, compared to just 8% that

anticipated such a decrease in December 2009, showing

that LPs have perhaps been less active in the asset class

this year than they had initially planned.

The vast majority (88%) of LPs plan to either increase

the amount of capital set aside for new commitments in

2011 compared to 2010 or invest capital at the same rate.

During 2011, just under half (49%) of investors expect

to commit the same level of capital as in 2010 and a

significant 39% of respondents intend to increase theamount of capital set aside for new commitments. The

remaining 12% intend to reduce the amount of capital they

commit that year.

Fig. 1: Investor Intentions: 2010 vs. 2009

Fig. 2: Investors Intentions for Their Private Equity Allocations

19%

36%

76%

62%

6% 2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Next 12 Months Longer Term

Decrease

Allocation

MaintainAllocation

IncreaseAllocation

ProportionofRespondents


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Fund managers can be encouraged by the longer-

term plans of LPs, as illustrated by Fig. 2. Few

intend to cut back their allocations and in fact many

foresee the size of their allocations rising over the

next few years. In our December 2009 survey, 11%

of respondents told us they anticipated reducing

their allocations to private equity over the next three

to five years. In June 2010, however, just 2% of

respondents expected to do so and a considerable

36% intend to increase their allocations (Fig.2).

Investors plans in the short term have also improved:

6% of respondents intend to reduce their exposure to

private equity over the following 12 months compared

to 13% in December 2009.

Areas of Investor Interest

The results of our survey point towards a gradualincrease in the amount of capital available for new

commitments in the coming months, although

perhaps not as great an increase as many would

have hoped. But what is this capital likely to be used

for? Without prompting with pre-defined answers,

we asked LPs which types of funds they intended to

make commitments to during 2010/11. The results

displayed in Fig. 3 indicate the areas of the market

that are attracting the most investor attention at

present. It is important to note that Fig. 3 only shows

the responses from LPs that intend to make further

commitments to private equity funds during 2010/11.

A considerable 65% of investors that are set to

be active in 2010/11 intend to commit to small to

mid-market buyout funds and 28% have identified

distressed private equity funds as a strategy they will

be seeking to invest in during the next 18 months.

We have also seen emerging markets continue to attract a

significant degree of attention from institutional investors.

In December 2009, 67% of respondents to our survey

stated that they will consider investing in emerging

markets. In June 2010, this had risen to 72%, showing

a gradual increase in investor appetite for emergingmarkets. When asked which countries or regions in

emerging markets are currently presenting the best

opportunities, 56% of LPs named Asia and 37% named

China specifically, as shown in Fig. 4.

Outlook for Fundraising

The results of our survey indicate that there is likely to

be a gradual increase in the amount of capital available

for fresh private equity commitments during the next 18

months. This is encouraging news for GPs set to enter the

market with their latest fund offerings. Despite the increasein the amount of capital investors are setting aside for

new commitments, however, it will still fall far short of the

amounts seen prior to the financial downturn. Fundraising

is consequently set to remain challenging over 2010 and

into 2011, although some improvement in the overall

amount of capital secured by funds is likely to occur.

Fund managers must be prepared to listen to what

LPs want in order to improve their chances of securingcommitments. Investors are set to remain cautious in

their future private equity investments and will continue to

scrutinize the terms and conditions of prospective funds

more closely than before the financial crisis. A recent

Preqin survey of investor attitudes towards fund terms

and conditions found that 42% of investors disagree

that interests are properly aligned between GPs and

LPs. When coupled with the fact that a considerable

81% of LPs feel that they have seen a definite shift in

the balance of power between GPs and LPs at fund

negotiations, we are likely to continue to see LPs push

for more concessions over the next few months, a factthat GPs must be prepared for in the current fundraising

environment.


12%

11%

12%

14%

14%

16%

21%

28%

65%

0% 20% 40% 60% 80%

Other

Cleantech

Mezzanine

Secondaries Funds

Venture

Large to Mega Buyout

Fund of Funds

Distressed Private Equity

Small to Mid-Market Buyout

Fig. 3: Types of Funds that Active LPs are Seeking to Invest in

During 2010/11

Proportion of Respondents

2%

4%

10%

12%

13%

19%

25%

25%

37%

56%

0% 10% 20% 30% 40% 50% 60%

Other

Middle East

Russia

Central & Eastern Europe

Africa

South America

Brazil

India

China

Asia

Fig. 4: Regions and Countries within Emerging Markets Viewed

by LPs as Presenting the Best Opportunties in the Current

Financial Climate

Proportion of Respondents


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Fundraising Overview

Q2 Fundraising in Focus

Private equity quarterly fundraising reachedits lowest level since 2003 in Q2 2010, with82 vehicles reaching a final close raising an

aggregate $41.3bn. Many in the industry, includingPreqin, had anticipated a recovery in the marketfollowing an increase in fundraising in the first quarterof the year, but these figures show that the difficultfundraising conditions experienced during theeconomic crisis are yet to ease, with fund managersstill struggling to gain investor commitments and many

of the funds that are closing doing so below target.

The $41.3bn raised by private equity funds in Q2

2010 represents a 32% decrease in capital raised

from the previous quarter, when $60bn was raised.

This new low point in fundraising shows that the

effects of the financial crisis are still very much

affecting the industrys ability to raise new capital.

Of the funds that are closing, many are doing so

below target, and after having spent a substantial

amount of time on the road. As can be seen in Fig.

6, 39% of the funds closed in Q1 2010 had been in

market for 19-24 months. A further 24% of funds had

been in market for longer than this, with 3% having

spent over three years on the road. For each year

between 2004 and 2008 the average time spent in

market by a private equity fund never exceeded 18

months; however, in 2010 to date the average time

taken by a fund to reach a final close has been 19.8

months as shown in Fig. 6.

In terms of fund type, the most capital was raised by

buyout funds during Q2 2010, with 14 such vehicles

raising an aggregate $13.9bn (Fig.7). Infrastructure

funds raised the second-largest amount of capital,with five such funds raising a combined $6.1bn

and accounting for 15% of the capital raised in the

quarter. Venture funds were the most numerous,

with 24 such vehicles closing having raised $4.4bn.

Real estate funds were the second most numerous

and raised the third-largest amount of capital, with 15

such funds raising $5.9bn and accounting for 14% of

capital raised in the quarter. This shows a significant

decline from the previous quarter when 12 real estate

vehicles raised an aggregate $9.8bn.

The table on page 10 shows details of the 10 largestfunds to close during Q2 2010.

Fig. 7: Q2 2010 Private Equity Fundraising by Type

8%

16%13%

39%

16%

5%3%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1-6Months

7-12Months

13-18Months

19-24Months

25-30Months

31-36Months

37Months +

Fig. 6: Time Spent on the Road for Funds Closed in Q2 2010

222119

3855

514851

63

94

80

109

122

140

149

126123

205

122

195

167

195

123

162

77

92

595360

41

0

50

100

150

200

250

Q12003

Q22003

Q32003

Q42003

Q12004

Q22004

Q32004

Q42004

Q12005

Q22005

Q32005

Q42005

Q12006

Q22006

Q32006

Q42006

Q12007

Q22007

Q32007

Q42007

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

Q32009

Q42009

Q12010

Q22010

Fig. 5: All Private Equity Fundraising by Quarter:

Q1 2003 - Q2 2010

Aggregate

CapitalRaised($bn)

Time Spent on the Road

ProportionofFundsClose

d

Type of Fund


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AWARDS 2009


10/2810

Fund

Manager

Type

FinalSize

(mn)

IndustryFocus

GeographicFocu

s

MadisonD

earborn

CapitalPa

rtnersVI

MadisonDearborn

Partners

Buyout

4,100USD

Diverse

NorthAmerica

GSInfrastructure

PartnersII

GSInfrastructure

InvestmentGroup

Infrastructure

3,100USD

Infrastructure

NorthAmerica,Eur

ope

CarlyleAsiaPartnersIII

CarlyleGroup

Buyout

2,550USD

Diverse

Australia,China,India,SouthKorea,Asia

StarwoodGlobal

OpportunityFundVIII

StarwoodCapitalGroup

RealEstate

1,800USD

Property

NorthAmerica,SouthAmerica

,Europe,Asia,

Africa,Global,Middle

East

AdventLatinAmerican

FundV

AdventInternational

Buyout

1,650USD

ConsumerProducts,Retail,ConsumerS

ervices,

FinancialServices,Aerospace,Educa

tion/

Training,BusinessServices

Argentina,Brazil,Mexico,So

uthAmerica,

CentralAmerica

Macquarie

Infrastructure

PartnersII

MacquarieCapitalFunds

Infrastructure

1,600USD

Infrastructure

Canada,Mexico,US

CDH

ChinaFundIV

CDH

ChinaManagemen

t

Company

Buyout

1,428USD

Diverse

China

CrownGlo

bal

SecondariesII

LGTCapitalPartners

Secondaries

1,200USD

Diverse

China,US,NorthAmerica,Europe,Global

ICGRecoveryFund2008

IntermediateCapital

Group

DistressedDebt

843EUR

Diverse

Europe

CarlyleGlobalFinancial

ServicesP

artners

CarlyleGroup

DistressedDebt

1,100USD

FinancialServices,Insurance

US,Global


TopTenFu

ndsClosedDuringQ22010byFinalC

loseSize


11/2811


Of the 82 vehicles closed during Q2 2010, over half(56%) are primarily focused on making investmentsin North America, with a similar proportion of the

aggregate capital raised accounted for by such funds. It isunsurprising that North America-focused funds account forsuch a large proportion of fundraising, but what is notable isthat primarily Asia and Rest of World-focused funds have raisedmore capital than their Europe-focused counterparts in thequarter.

As can be seen in Fig.8, in Q2 2010 17 funds focused primarilyon Asia and Rest of World closed with $9bn in commitments,

accounting for 22% of the aggregate capital raised in the

quarter. This is a marked increase from the same time last

year, when such funds raised $2.5bn and accounted for just

3% of the aggregate capital raised in the quarter. However,

it represents a decrease from Q1 2010 when such vehicles

raised $14.5bn and accounted for 29% of all capital raised in

the quarter.

Funds focused primarily on Europe accounted for the lowest

amount of capital raised in the quarter with 19 vehicles

raising $8bn, which represents 19% of the total. This marks a

substantial shift in regional fundraising compared to both the

previous quarter and the same period last year. In Q2 2009 23

Europe-focused funds raised $24.7bn, accounting for a more

sizeable 31% of capital raised. Similarly in Q1 2010 Europe-

focused funds accounted for 29% of capital raised during the

quarter, with 21 vehicles having garnered $14.6bn.

A total of 46 funds primarily focused on North America closed

during Q2 2010, raising an aggregate $24.3bn. This is a

significant decrease from the same time last year, when 91

vehicles primarily investing in the region closed, having raised

an aggregate $102.1bn. There has been a significant reduction

in the amount of capital raised by North America-focused

funds over this period; however, this has been in line with the

decrease that has been seen across private equity globally.

Primarily North America-focused funds still account for the

largest proportion of capital raised by private equity fundsworldwide and many of the largest funds closed in the quarter

will be investing in this region.

46

1917

24.3

8.09.0

0

5

10

15

20

25

30

35

40

45

50

North America Europe Asia and Rest of World

No. FundsRaised

AggregateCapitalRaised($bn)

Regional Fundraising

Fig. 8: Q2 2010 Private Equity Fundraising by Primary Geographic Focus



12/2812

Buyout & Venture Fundraising

Fig. 9: Private Equity Buyout Fundraising by Quarter:

Q1 2008 - Q2 2010In Q2 2010 14 buyout funds closed having raisedan aggregate $13.9bn, which accounted for 34% ofthe capital raised by all private equity funds in the

quarter. This represents a decrease in capital raisedby buyout funds compared to the previous quarter,when 22 buyout vehicles raised $17.3bn althoughtheir share of the market has remained relativelyconsistent.

The largest buyout fund to close in Q2 2010

was Madison Dearborn Capital Partners VI,a North America-focused vehicle targeting

management buyouts, growth equity financings,

recapitalizations and acquisition-orientated

financing transactions. It closed on $4.1bn in

May 2010, short of its original target of $7.5bn.

The second-largest buyout fund to close in the

quarter was Carlyle Asia Partners III, which raised

$2.55bn. It too closed short of its original target of

$3bn.

Venture fundraising was down considerably from

Q1 2010, with 24 vehicles closing in Q2 2010

having raised an aggregate $4.4bn, compared

to 30 funds closing in Q1 2010 having raised

$11.6bn. As a result, venture funds accounted

for a smaller proportion of the total capital raised,

with commitments to such funds accounting for

11% of the total in Q2 2010, compared to 23% in

the previous quarter.

Columbia Capital Equity Partners V was the

largest venture fund to close in Q2 2010, closing

short of its original target on $441mn in April

2010. The fund will focus on investments in the

US media and technology sectors.

Fund Fund Manager Size (mn)

Madison DearbornCapital Partners VI

Madison DearbornPartners

4,100 USD

Carlyle Asia Partners III Carlyle Group 2,550 USD

Advent Latin AmericanFund V

Advent International 1,650 USD

CDH China Fund IV CDH ChinaManagement Company

1,428 USD

Gilde Buyout Fund IV Gilde Buy Out Partners 800 EUR

Fig. 11: Five Largest Buyout Funds Closed in Q2 2010 Fig. 12: Five Largest Venture Funds Closed in Q2 2010

Fig. 10: Private Equity Venture Fundraising by Quarter:

Q1 2008 - Q2 2010

Fund Fund Manager Size (mn)

Columbia Capital EquityPartners V

Columbia Capital 441 USD

CX Partners CX Partners 515 USD

Drug Royalty II DRI Capital 701 USD

SV Life SciencesFund V

SV Life Sciences 523 USD

Avigo SME Fund III Avigo Capital Partners 240 USD


87 85

74

82

52 57

43

38

3024

15.5 16.2 17.1 13.98.6 7.1 7.2

6.2

11.6

4.40

10

20

30

40

50

60

70

80

90

100

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

Q32009

Q42009

Q12010

Q22010

No. FundsRaised

AggregateCommitments($bn)

5257

46

64

33

2522

16

22

14

67.9

52.1

41.6

71.3

33.229.4 30.6

14.1

17.3

13.9

0

10

20

30

40

50

60

70

80

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

Q32009

Q42009

Q12010

Q22010

No. FundsRaised

AggregateCommitments($bn)


13/2813


Buyout and venture funds raised just under half of allprivate equity capital in Q2 2010, with the remaining56% raised by other types of vehicles. Of these funds,

infrastructure and real estate funds raised the most capital,although real estate fundraising is down by 40% from theprevious quarter.

As can be seen in Fig. 13, infrastructure funds raised the

most capital out of all other types of funds, with six such

funds raising a combined $6.7bn and accounting for 16% of

the total capital raised in the quarter. This is an increase fromthe previous quarter when five vehicles raised $5.9bn.

Real estate funds raised the second-largest amount of

capital and were the most numerous, with 17 real estate

funds raising $6.6bn and accounting for 16% of the capital

raised in the quarter. However, real estate fundraising is

down from the previous quarter when 18 such funds raised

$9.8bn and represented 16% of the fundraising market.

Starwood Global Opportunity Fund VIII was the largest real

estate fund to close in the quarter, raising $1.8bn to invest

globally in a range of property.

Six private equity fund of funds vehicles reached a final close in

Q2 2010, raising an aggregate $1.1bn. This marks a decrease

of 50% in fundraising for funds of funds compared to Q1 2010,

when nine such funds raised $2.2bn. One real estate fund of

funds reached a final close in Q2 2010 on $300mn.

There are two distressed debt funds in the table in Fig. 14,

the only two such funds to reach a close in the quarter.

Between them these vehicles raised an aggregate $2.2bn

and accounted for 5% of the capital raised in the quarter. This

marks a 69% decrease from the previous quarter in terms of

capital raised.

Crown Global Secondaries II was the largest secondaries fund

to close in the quarter, with the $1.2bn collected accounting for

over half of the capital raised by such vehicles in the quarter.

Private Equity Fundraising: Other Types

Type of Fund

Fig. 13: Q2 2010 Private Equity Fundraising (Excluding Buyout

and Venture Funds) by Fund Type

Fig. 14: 10 Largest Other Types of Funds Closed in Q2 2010

Fund Fund Manager Fund Type Size (mn)GS Infrastructure Partners II GS Infrastructure Investment Group Infrastructure 3,100 USD

Starwood Global OpportunityFund VIII

Starwood Capital Group Real Estate 1,800 USD

Macquarie Infrastructure PartnersII

Macquarie Capital Funds Infrastructure 1,600 USD

Crown Global Secondaries II LGT Capital Partners Secondaries 1,200 USD

ICG Recovery Fund 2008 Intermediate Capital Group Distressed Debt 843 EUR

Carlyle Global Financial ServicesPartners

Carlyle Group Distressed Debt 1,100 USD

Starwood Capital GlobalHospitality Fund II

Starwood Capital Group Real Estate 965 USD

Sankaty Middle Market

Opportunities Fund

Sankaty Advisors Mezzanine 904 USD

Fortress Japan Opportunity Fund Fortress Investment Group Real Estate 75,000 JPY

White Deer Energy I White Deer Energy Natural Resources 821 USD



14/2814

Following four years of annual increases in boththe number of private equity funds in market andthe aggregate capital sought, 2010 marked the

first year in which there was a decline. At the start of2010 1,582 private equity vehicles were targeting capitalcommitments of $691bn, a 21% decrease in aggregatecapital sought from Q1 2009. As 2010 has progressedthis figure has declined even further and, as of Q3 2010,there are 1,510 vehicles on the road targeting $557bn.

Since the beginning of the year there has beena decrease of 5% in the number of private equity

vehicles on the road and a 19% reduction in the

aggregate capital targeted by such vehicles, as

illustrated in Fig.15. These figures show that

the difficult fundraising conditions experienced

throughout the financial crisis are yet to ease. As a

result, many fund managers are having to reduce

their fundraising targets, and this is reflected in the

significant decrease in the average target size of

funds on the road. In Q1 2009 the average fund

in market was targeting $547mn, this figure now

stands at $369mn, representing a decrease of

nearly one-third.

A large proportion of the funds in market are

primarily focused on North America, with 697 such

vehicles targeting an aggregate $291.7bn, as shown

in Fig. 16. Primarily North America-focused funds

account for 46% of the number of funds in market

and over half of the aggregate target capital. Such

funds also have the largest average target size out

of all funds in market, with the average fund target of

a North America-focused fund standing at $419mn,

compared to $346mn for Europe-focused funds and

$311mn for Asia and Rest of World-focused funds.

The largest fund currently in market is primarily

North America-focused Blackstone Capital Partners VI.

The buyout fund is targeting $15bn, having already held its

third interim close on $8.8bn in August 2009 and is likely to

hold a final close later this year. Like many of the primarily

North America-focused funds on the road, the vehicle will

also consider making investments in other regions.

Asia and Rest of World-focused funds are targeting the

second-largest amount of capital. 443 such vehicles are

seeking $137.8bn in aggregate commitments, accountingfor 29% of the number of funds and 25% of the aggregate

targeted capital of all funds in market.

There are currently 369 primarily Europe-focused funds

on the road targeting an aggregate $127.7bn in investor

capital. Europe-focused funds account for 23% of the

global targeted capital and 24% of the number of funds on

the road.

Funds on the Road Overview

1,304

1,6241,673

1,6221,574 1,582 1,562

1,510

705

889 887807

754691

636557

0

200

400600

800

1,000

1,200

1,400

1,600

1,800

Q12008

Q12009

Q22009

Q32009

Q42009

Q12010

Q22010

Q32010

No. Fundson Road

AggregateTarget($bn)

697

369

443

291.7

127.7 137.8

0

100

200

300

400

500

600

700

800


No. Fundson Road

AggregateTarget($bn)

Fig. 15: Funds in Market by Quarter

Primary Geographic Focus

Fig. 16: Composition of Funds in Market by Primary

Geographic Focus

Funds on the Road


15/2815


Funds on the Road by Type

Real estate funds are targeting the largest ammount ofcapital of all funds in market, accounting for 24% ofall the commitments being sought by funds in market

worldwide. There are 378 private equity real estate vehiclescurrently on the road targeting an aggregate $133bn in investorcommitments. This is a decrease in both the number andaggregate target from the same period last year, when 403such funds were targeting a combined $191bn. This representsa 30% decrease in the aggregate capital sought by real estatevehicles.

There has been a similar decline in the number and

aggregate target of buyout vehicles on the road since

the same time last year. In Q3 2009 235 buyout funds

were on the road seeking an aggregate $168bn in capital

commitments. A year later 201 buyout vehicles are in

market with an aggregate target of $114.4bn, which

represents a decrease in targeted capital of 32%. Buyout

funds currently account for 20% of the aggregate targeted

capital and 13% of the number of funds in market.

Venture funds are the most numerous type of fund in

market, with 448 such vehicles currently on the road

representing 30% of the total number of funds in market.

Such vehicles are targeting the third-largest amount

of capital, with an aggregate target of $79.7bn. This

represents a relatively small decrease in aggregate capital

targeted compared to last year, with 4% less capital being

sought in Q3 2010.

The fourth-largest amount of capital is being targeted

by infrastructure funds, with 103 such vehicles seeking

$78.2bn in aggregate commitments and accounting for

14% of the capital targeted. Infrastructure vehicles have

the largest average target size of fund types, with the

average infrastructure fund seeking $759mn in investor

commitments. This is significantly lower than at the

same point in 2009 when the average target size of an

infrastructure fund in market was $933mn, representing a

decrease of 19%.

Funds of funds, distressed private equity funds, and

secondaries funds all account for a significant proportion

of the funds in market. Funds of funds represent 8% of all

capital sought by funds in market, with 144 funds targeting

$42bn. There are 53 distressed private equity funds

targeting $37.1bn, accounting for 7% of the total targeted

capital. Secondaries funds account for 2% of the number

of funds in market and 3% of all capital targeted.

Fig. 17: Composition of Funds in Market by Fund Type

Type of Fund



16/2816

Fundraising Future Predictions

Although institutional investors are growing in confidence

as a result of deals activity picking up and private equity

fund performance recovering following the big drops we

saw last year, fundraising remains an extremely challenging

prospect.

As our LP survey on page six shows, most investors

(76%) are simply looking to maintain allocations in the

next 12 months. While in previous years maintaining

an allocation would require significant reinvestment ofdistributed capital from existing investments, the fact that

distributions to investors have been so low means that

investors have not had to invest in new funds at the same

rate in order to keep their allocations steady. This has

clearly impacted upon fundraising in Q2 2010, which saw

the lowest aggregate total raised since 2003.

The length of time required to raise a fund from launch

to final close has extended to a record 19.8 months, with

the increasingly challenging market causing many firms to

hold multiple interim closes before reaching a final close.

With market conditions improving, the churn of capital is

starting to pick up, and this will have a positive impact on

new fundraising as investors seek to reinvest distributed

capital. This extra capital may allow some of the firms that

have already held multiple interim closes to achieve a final

close on vehicles that have been in market for some time.

Another important factor to consider is that while there are

still lots of funds on the road, and amongst them offerings

from some top-quality managers, many of the brand-name

and best-performing managers have delayed the launch

of their next funds due to the current climate and the fact

that they still have available capital from older vehicles.

Now that dealflow has started to pick up, there will be an

increased need for a significant number of these big name

fund managers to launch new offerings towards the end

of this year and into next year. We are already seeing

the levels of dry powder begin to fall, and this trend will

continue until fundraising picks up. Many managers will

also see themselves in a better position to raise capital

now that their fund NAVs have improved, and they have

more positive news to communicate to existing and

potential new LPs on the deals front.

It is therefore likely that we will see a real pick-up in

fundraising activity as we move into 2011, helped by

the plans of more than a third of investors to increase

allocations in the longer term. In the short term, it is likely

that we are going to see a number of biggerfirms entering

the fundraising market in pre-marketing mode before

launching in earnest in 2011. The next six months are

likely to remain at relatively low levels, but if the market for

deals and exits continues to improve, things are likely to

improve significantly in 2011, with quarterly totals for next

year potentially reaching the $100bn mark once again.

The one sector that could continue to struggle into and

beyond 2011 is private equity real estate, where we

have not seen the same kind of pick-up in activity and

improvement in fund performance as elsewhere in the

industry. With PERE collecting amongst the highest

levels of capital of all fund types aside from buyout funds

in recent years, this will have an impact on the absolute

levels of capital that the overall industry is able to garner.

Funds on the Road

Fig. 18: Possible Follow-On Funds to Be Launched in Short to Medium Term

Firm Name Available Capital Position

Goldman Sachs PE Group Last major buyout fund (2007 vintage) 40% called as of December 31st 2009

Carlyle Group Last major US- and Europe-focused vehicles are 2007 vintage (40% and 33% called respectively as of December 31st 2009)

Kohlberg Kravis Roberts KKR Fund 2006 is now 80% called up, although more recent European and Asian funds still have ample dry powder

Warburg Pincus Last major 2007 vintage fund 45% called as of March 31st 2010

Permira Last major fund is 2006 vintage and was 65% called as of March 31st 2010

First Reserve Corporation 2008 vintage fund 40% called as of March 31st 2010

Providence Equity Partners Last major buyout fund (2007 vintage) 70% called as of March 31st 2010

AXA Private Equity Last LBO fund (2007 vintage) 50% called as of March 31st 2010

Thomas H Lee Partners 2006 vintage buyout fund 55% called as of December 31st 2009, firm has done three additional deals since

Avenue Capital Group Most recent US fund is 100% called, most recent European fund is over 80% called


17/2817


Global dealflow in Q2 2010 represents the

strongest quarter for private equity-backed

buyout deals in the post-credit crunch

landscape, with a total of 411 private equity buyout deals

announced with an aggregate value of $43.3bn (Fig.

19). This represents a 60% increase in aggregate deal

value from the previous quarter, when 356 deals were

announced with an aggregate value of $27.1bn.

The buyout industry witnessed a significant decline in

dealflow moving into 2009, with the aggregate dealvalue reaching its lowest point in Q1 2009, when it

stood at $11bn. Dealflow began picking up momentum

in Q4 2009, when 382 deals were announced with an

aggregate value of $40.4bn. Despite a disappointing

first quarter in 2010, when aggregate deal value fell by a

third from the previous quarter, Q2 2010 shows that the

environment has improved for buyout deals.

As shown in Fig. 20 aggregate deal value in Q2 2010

in North America increased sharply in comparison with

the previous quarter with 175 deals accounting for

$26.7bn. Dealflow in this quarter was stronger in terms of

aggregate value than for any quarter since 2008, proving

that buyout funds focused on North America are actively

completing deals. Nine of the 10 largest deals completed

in Q2 2010 took place in North America, with these deals

accounting for a considerable $16.5bn, or 38%, of the

aggregate deal value in this quarter.

Dealflow in Europe has remained relatively stable. 169

deals were announced in Q2 2010 with aggregate deal

value of $11bn compared to the $10.3bn in deal value

seen in the previous quarter. The sixth-largest deal

worldwide in the quarter, the $1.4bn recapitalization of

Avolon by Cinven, CVC Capital Partners and Oak HillCapital Partners, took place in Ireland.

Asia and Rest of World witnessed increased deal activity

in Q2 2010 with 67 deals announced with an aggregate

deal value of $5.6bn. This represents a 40% increase in

aggregate deal value in comparison to Q1 2010, when

39 deals with an aggregate deal value of $4bn were

announced.

464

509483

325288 295

357382

356

41158.4

68.0

45.1

16.711.0

14.6 18.9

40.4

27.1

43.3

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

0

100

200

300

400

500

600

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

Q32009

Q42009

Q12010

Q22010

No. of Deals Aggregate Deal Value

38.7

27.1

22.2

6.24.4

8.6 9.5

21.0

12.8

26.7

13.2

32.8

20.9

6.6

3.3 2.0

5.6

12.8

10.311.0

6.58.1

2.0 3.9 3.33.9

3.8

6.64.0

5.6

0

5

10

15

20

25

30

35

40

45

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

Q32009

Q42009

Q12010

Q22010


Deals Overview & Deals by Region

Fig. 19: Number and Aggregate Value of Buyout Deals

by Quarter

NumberofDeals

AggregateDealValue($bn)

Fig. 20: Aggregate Deal Value in Quarter by Regional Focus

AggregateDealValue($bn)



18/2818

Almost half of all private equity-backed dealsannounced globally in Q2 2010 were leveragedbuyouts, accounting for 54% of the aggregate

deal value worldwide during the quarter (Fig. 21). Thisis down from the previous quarter when such dealsaccounted for 60% of the aggregate deal value.

Growth capital investments accounted for 23% of

deals announced during Q2 2010, with such deals

representing 7% of the aggregate deal value. A

total of 3% of deals announced in Q2 2010 were

public to private transactions with these large dealsrepresenting 24% of the global aggregate deal value.

Significant public to private deals announced in Q2

2010 include the $3.4bn acquisition of Interactive

Data Corporation by Warburg Pincus and Silver

Lake, and the announced privatization of DynCorp

International in a $1.5bn transaction by Cerberus

Capital Management.

In terms of industry, the highest dealflow in Q2 2010

was in the industrial sector with a quarter of all global

buyout deals and 15% of the aggregate deal value

globally accounted for by this sector (Fig. 22). The

consumer and retail sector was the most prominent

sector in terms of aggregate deal value, accounting

for 26% of aggregate deal value and 18% of the

number of deals announced in Q2 2010. This marks

an increase from the previous quarter when deals

in the sector accounted for 20% of the aggregate

deal value announced in the quarter. The business

services sector, which includes business, financial

and legal services, accounted for 15% of all deals

announced globally and 23% of aggregate deal value

in Q2 2010.

Mid-market and large deals represent the majority ofbuyout capital deployed globally by fund managers,

with deals valued at $500-999mn and over $1bn

representing 23% and 46%, respectively, of total

aggregate deal value in the quarter. As shown in Fig.

23, 50% of buyout deals globally in Q2 2010 were

valued at less than $100mn, with deals in this value

band representing only 5% of the aggregate deal

value globally.

50%

5%

23%

13%

10%

13%

9%

23%

8%

46%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Less than $100mn $100-249mn $250-499mn $500-999mn $1bn+

Fig. 23: Aggregate Deal Value in Quarter by Deal Size

Fig. 22: Aggregate Deal Value in Quarter by Industry

49% 54%

23%7%

19%

5%

3%

24%

3%5%

3%5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


LBO Growth Capital Add-on Public to Private PIPE Recapitalization

Fig. 21: Aggregate Deal Value in Quarter by Type

Deals by Type, Value & Industry

Q2 Private Equity-Backed Deals in Focus


19/28

PRIVATE EQUITY

FundsInvestments

Transactions

Exits

For more information,

please contact:

Carl A. de Brito

+1 212 698 3543

[email protected]

Daniel ODonnell

+1 215 994 2762

[email protected]

Private equity investors around the world rely on our

interdisciplinary team of 200 deal lawyers at every

phase of the investment life cycle.

Dechert is consistently recognized as one of the

most active law firms for fund formation and fund

investments by Private Equity Analyst and among

the top ten law firms for private equity buyouts in

The American Lawyers Corporate Scorecard. We

are also ranked among the top law firms for total

value and volume of North American privateequity buyouts by mergermarket and have been

recommended for private equity transactions by

Chambers, The Legal 500, andJUVE.

dechert.comU.S. Austin Boston Charlotte Hartford New York Orange County Philadelphia Princeton San Francisco Silicon Valley

Washington, D.C. EUROPE Brussels Dublin London Luxembourg Moscow Munich Paris ASIA Beijing Hong Kong


20/2820

Largest Deals & Notable Exits

Q2 Private Equity-Backed Deals in Focus

Fig. 24: 10 Largest Deals in Quarter

Company Name Date Deal Value Investment Type Acquiror/Financial Sponsor Location Industry

Extended Stay May-10 USD 3.9bn BuyoutBlackstone Group, Centerbridge Capital

Partners, Paulson & Co.US Hotels

Interactive DataCorporation

May-10 USD 3.4bn Public to Private Silver Lake, Warburg Pincus US Financial Services

Michael Foods,Inc. May-10 USD 1.7bn Buyout Goldman Sachs Private Equity Group US Food

DynCorpInternational

Apr-10 USD 1.5bn Public to Private Cerberus Capital Management US Business Services

Vertafore, Inc. Jun-10 USD 1.4bn Buyout TPG US IT

Avolon May-10 USD 1.4bn RecapitalizationCinven, CVC Capital Partners, Oak Hill Capital

PartnersIreland Transportation

American TireDistributors

Apr-10 USD 1.3bn Buyout TPG US Distribution

Kroll Jun-10 USD 1.1bn Add-on Altegrity, Providence Equity Partners US Business Services

Sedgwick CMS Apr-10 USD 1.1bn Buyout Hellman & Friedman, Stone Point Capital US Business Services

InVentiv Health May-10 USD 1.1bn Public to Private Thomas H Lee Partners US Healthcare

Fig. 25: 5 Notable Exits in Quarter

Company NameDate

AcquiredFirms Investing

Transaction

SizeExit Type Date Sold To

Exit

Transaction

Size

Cognis Nov-01

Goldman SachsPrivate Equity Group,

Permira, SchroderVentures

EUR 3bn Trade Sale Jun-10 BASF plc EUR 3.1bn

Vertafore, Inc. Nov-04

Hellman & Friedman,

JMI Equity

Secondary

Buyout Sale Jun-10 TPG USD 1.4bn

Michael Foods,Inc.

Nov-03Thomas H Lee

PartnersSecondary

Buyout SaleMay-10

GoldmanSachs PrivateEquity Group

USD 1.7bn

Sedgwick CMS Jan-06

Evercore Partners,Fidelity National

Financial, Thomas HLee Partners

USD 635mnSecondary

Buyout SaleApr-10

Hellman &Friedman,

Stone PointCapital

USD 1.1bn

Amadeus Jul-05

Air France, BCPartners, Cinven,

Deutsche Lufthansa,Iberia

EUR 4.3bn IPO* Apr-10 n/a EUR 1.3bn

* Partial Exit


21/2821


Dry Powder

The amount of dry powder available to fundmanagers of all private equity funds grew ata significant rate in the years preceding the

financial crisis, but since December 2008 dry powderlevels have stopped their growth and started todecline.

As can be seen in Fig. 26, the amount of dry powder

available has decreased across all fund types with the

exception of real estate funds and, as of June 2010,

is lower than it was in 2008. The most significant

decrease has been for distressed private equityfunds, with the level of uncalled capital available to

such funds decreasing by 12% between December

2008 and June 2010. The dry powder reserves of

mezzanine funds have decreased by 9% in this

period.

In terms of geography, the amount of dry powder

available to funds primarily focused on North America

has decreased by 7% since December 2008 and now

stands at $580bn. In the same period funds primarily

focused on Europe have seen a decrease of 3%, and

vehicles primarily focused on Asia and Rest of World

a decrease of 4%.

The decline in dry powder is a result of the significant

slowdown in private equity fundraising over the

past 18 months, during which time very little fresh

capital has been committed to the asset class. As

the number of deals being done has also slowed, dry

powder has still remained at a relatively high level,

although a recent upturn in activity is likely to lead to

a more dramatic decline in the coming months before

fundraising has a chance to recover.

Fig. 28 shows the amount of capital invested anddry powder remaining for buyout funds of vintages

2004-2009. The median investment period for buyout

funds is five years, which means that vintage 2006

and 2007 funds will be nearing the end of their

investment period over the next few years. Vintage

2006 funds, which will typically be reaching the end of

their investment periods in 2011, still have $70bn of

dry powder at their disposal, while vintage 2007 funds

have $148bn. It is likely that fund managers will be

keen to deploy this capital over the next two to three

years, a factor contributing to the recent increase in

activity, helped by improving market conditions.


0

200

400

600

800

1000

1200

Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Jun-10

Other

Mezzanine

Distressed

Real Estate

Venture

Buyout

Fig. 26: Dry Powder by Fund Type: 2003- 2010 YTD

DryPowder($bn)

61

143174

115

50

13

4

20

70

148

174

103

0

50

100

150

200

250

300

2004 2005 2006 2007 2008 2009

DryPowder($bn)

CapitalInvested($bn)

Fig. 28: Buyout Funds - Capital Invested and Dry Powder

Remaining by Vintage Year as of 31st December 2009

0

100

200

300

400

500

600

700

Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Jun-10

NorthAmerica

Europe

Asia andRest ofWorld

Fig. 27: All Private Equity Dry Powder by Regional Focus:

2003-2010 YTD

DryPowder($bn)


22/2822

Data to Q4 2009 is now in, and shows thatfund performance is continuing its recovery,with net asset values increasing from Q3

2009 by 5.6% during the fourth quarter of 2009.NAVs increased by 13.5% over the course of 2009compared to a decrease of 15.8% in 2008.

Looking at the change in net asset value betweenconsecutive quarters in recent years shows thatfund valuations registered almost no change in

Q1 and Q2 2008, decreased steeply between Q32008 and Q1 2009 due to the effects of the financialdownturn and implementation of FASB 157 mark-to-market accounting standards, and started recoveringin Q2 2009. The weighted quarterly change, whichtakes into account fund size, shows that the biggestquarter-on-quarter decline in net asset value camein Q4 2008, with a fall of 14.0%. In the first quarterof 2009 the decrease in NAV continued but at amuch slower rate. Fund valuations started to recoverin the second quarter of 2009 and the largest NAVimprovements happened in Q3 2009, with valuationsincreasing by 6.7%.

The discrepancy between the weighted and thenon-weighted changes in NAV shows that largerfunds have seen wider variations in their valuations.Larger funds were the most affected by the financialcrisis but have also recovered faster.

The overall private equity horizon IRR for theone-year period to December 31st, 2009 standsat 13.8%, an improvement on the -9.2% posted atSeptember 30th, 2009. All private equity strategiesare now posting positive one-year returns as atQ4 2009. With a horizon IRR of 16.7%, buyout isposting the highest returns. Venture capital showsa one-year return of 5%, mezzanine 2.3% and funds of

funds 0.2%.

Private equity three-year horizon IRRs are just above0% for all fund types except mezzanine, which standsat 6.5%. Long-term returns remain strong, with privateequity posting an annualized 17.5% over the five-yearperiod. With a horizon IRR of 21.8%, buyout funds areposting the strongest returns over the five-year period.

As Fig. 30 shows, over the past year the industryhas fallen short of the returns posted by all of themajor listed indices shown. However, it is importantto consider the long-term nature of private equity, andover a longer time period the asset class has achievedout-performance over listed equities beating all butthe MSCI emerging markets over three years, andexceeding all indices over a five-year period.

Portfolio companies were significantly marked down inthe second half of 2008 but fund valuations and privateequity performance have improved steadily since thesecond quarter of 2009. Private equity performancehas still not reached the level seen prior to the financialcrisis but is on a strong path to recovery.

Performance Update

Performance Update

-20%

-15%

-10%

-5%

0%

5%

10%

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

Q32009

Q42009

Non-Weighted

Weighted

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1-year to Dec 2009 3 years to Dec 2009 5 years to Dec 2009

All PrivateEquity

S&P 500

MSCIEurope

MSCIEmergingMarkets

Fig. 29: All Private Equity Change in NAV by Quarter

AverageChangein

NAVfromPreviousQuarter

AnnualizedReturns

Fig. 30: Private Equity Horizon IRR vs. Public Indices,

as of 31 Decemeber 2009


23/2823


Fund Terms & Conditions

Following extensive discussion, surveying and

roundtable meetings, the Institutional Limited

Partners Association (ILPA) released its best

practice guide to private equity fund terms and

conditions, the Private Equity Principles, in September

2009. ILPA currently has over 100 organizations

endorsing the practices outlined in the document.

Using Preqins extensive data on terms and conditions taken

from the newly released 2010 Preqin Fund Terms Advisorpublication, it is possible to assess the level to which new funds

are adhering to a selection of quantifiable ILPA best practices.

Deal-by-Deal vs. Whole Fund Carry

ILPA:A standard all-contributions-plus-preferred-return-back-

first model should be recognized as best practice.

Preqin: 62% of funds closed in 2009, 2010 and currently

raising utilize a whole fund structure

Although the majority of funds are adhering to a whole fund

carry structure, 38% continue to work on a deal-by-deal basis.

Within Europe, whole fund structures are the norm, with

only 7% of vehicles focusing on the region using a deal-by-

deal structure. In the US, half of all funds are still distributing

proceeds on a deal-by-deal basis.

Management Fees Post-Investment Period

ILPA:Management fees should step down significantly

upon the formation of a follow-on fund and at the end of the

investment period.

Preqin: Only 3% of funds maintain the original management

fees upon the completion of the investment period.

This is an area where the vast majority of fund managers are

adhering to the Principles, although there is a wide range of

different methods used for reducing fees, with the savings for

LPs varying considerably. For buyout funds, 99% of funds willreduce the fees, but 61% still charge the same rate applied only

to the invested capital. 25% of funds go further, reducing the

rate and applying to invested capital only.

Transaction and Monitoring Fees

ILPA: All transaction, monitoring, directory, advisory, and exit

fees charged by the general partner should accrue 100% to the

benefit of the fund.

Preqin:39% of the most recent funds rebate 100% of such

fees back to the fund.

There has been considerable movement towards rebating fees

to the fund in recent years, but the majority of funds still retain aproportion of such fees for the GP. Only 1% of recent vehicles

rebate less than 50% of fees, but a considerable 28% rebate

only 50% - 60%.

No-Fault Divorce Clause

ILPA: No fault rights upon a two-thirds in interest vote of limited

partners for the following: Removal of the general partner;

Dissolution of the Fund.

Preqin: Less than 4% of the most recent funds comply with this

statement. 80% in interest is the most common supermajority.

Although only a small minority of funds set the supermajority

as low as the 67% identified by ILPA, it is now commonplace

to have a no-fault divorce clause in place. 58% of funds

set an 80% supermajority, while 34% require a 70% - 79%supermajority.

GP Contributions

ILPA: The general partner should have a substantial equity

interest in the fund to maintain a strong alignment of interest

with the limited partners.

Preqin:39% of funds have a GP contribution of 1-1.99%; 22%

of funds have a GP contribution of 2-2.99%; 10% of funds have

a GP contribution of 5-5.99%; 14% have a GP contribution of

10% or more.

A GP making a substantial commitment to their own vehicle is

an excellent way to align interests in the GP LP relationship,

and has been noted by placement agents as one of the best

ways that GPs can make a statement of intent when seeking

commitments for new vehicles in the current market. We

have seen a notable increase in the level of GP capital being

committed to funds, with 54% of the most recent funds having

above 1% commitment levels, and 14% of new vehicles seeing

GP contributions of 10% or higher.

Summary

With investors having significantly less capital to deploy into

new vehicles than in previous years, and with a large number

of vehicles still on the road, it is clear that the balance of power

has swung towards LPs in fund terms negotiations. With over100firms already endorsing the Principles, it is important that

firms are aware of these best practices, and have considered

them when assembling PPMs. Preqins data shows that while

some areas of the Principles are being followed, other areas

are not enjoying such widespread support, with the continued

prevalence of deal-by-deal carry funds in the US perhaps the

most notable area where GPs continue to resist change.

Although only a minority of LPs polled in a recent Preqin survey

would not dismiss a fund based solely on their non-adherence

to the Principles (13%), the majority would see this as a reason

to consider not investing (58%). As a result it is especially vital

that those managers which maintain non-best practice termsare able to communicate exactly why this is to an increasingly

terms and conditions-sensitive LP universe.

Are the ILPA Principles Being Followed?



24/28

The Fund Terms Advisor is a vital tool for all fund formation lawyers and for private equity firms andplacement agents involved with the fund formation process. It also contains valuable intelligence for allthose investing in private equity, and for those advising LPs. Key features include:

Actual terms and conditions data for over 1,400 funds, including management fees and mechanismsfor reduction after the investment period, carry, carry distribution methods, hurdles, preferred return,fee rebates, no-fault divorce clause, GP commitments, investment period.

Benchmark terms and conditions data for funds of all different types: buyout, venture, real estate,distressed, mezzanine, fund of funds, secondaries and more

Results of our LP and placement agent surveys - the most comprehensive studies of current opinionson fund terms and conditions ever conducted.

Data and analysis on the actual fees and costs incurred by LPs, with listings showing costs for 1,200named vehicles.

Full access to our updated Fund Terms Advisor Online product, which enables you to model the real

economic impact of fund terms and conditions, and download detailed fund terms for further analysis. Comprehensive analysis on all aspects of private equity fund terms and conditions including how

conditions have changed over time and what variations exist amongst funds of different type, size andregion.

Listings for 100 leading law firms involved in the fund formation process, including contact details andsample previous assignments.

2010 PreqinFund Terms Advisor:Order Form

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